What a difference a year makes. At this time in 2008 the Pacific Northwest economy was still chugging along — albeit at a modest rate — while other parts of the country slipped into recession. Now, unfortunately, the region is catching up with its recessionary neighbors, and some areas are feeling the pinch from the national credit crisis, just like everyone else.
Real estate markets were just beginning to cool off at the end of 2007, but by fall 2008 they had caught up with the chill in all but the worst-hit areas of the rest of the nation. Unemployment is rising. And revenue projections for state budgets are in free-fall, forcing political leaders to choose between cutting programs or raising taxes. The former course is by far the more often taken.
All of this has implications for the Pacific Northwest's heavy construction industry.
One measure of heavy construction activity in the Pacific Northwest, the monthly Contract Awards Summary compiled by PB&E, reported that the combined year-to-date volume of publicly reported non-residential construction contract awards in the five Northwest states through November 2008 was running 8 percent behind 2007's record-setting pace. The drop-off, however, was confined entirely to the Building category, which was down 34 percent; the other six categories were outpacing 2007. At the same time, only two states, Oregon and Washington, were in negative territory. It's important to note that the Contract Award Summary only tracks publicly reported project prices, so very little private work is reflected in the report.
More specifically, there are reports of layoffs in the design industry and weakness in heavy-equipment sales.
Still, there are causes for optimism. The November election brought not only promises of massive federal infrastructure spending by president-elect Obama but also voter approval in the Northwest of several large public works proposals, including construction of schools, jails, parks and a massive Sound Transit expansion in the Seattle area. Contractors may not begin tasting the fruits of these initiatives during 2009, but they will eventually.
And the Northwest remains home to vibrant industries — software, aerospace, biotechnology to name a few — that will continue to need construction services for years to come.
Jim Haughey, Reed Construction Data economist, predicts the Northwest will experience a strong comeback in Building construction during 2009 that will offset declines in the Highway/Heavy categories to produce an overall gain of 7 percent in the value of Northwest construction contract awards for the year.
After a banner year in 2007, Washington construction contract awards tailed off in 2008 but still outpaced 2006. It's clear that the national slowdown has reached Seattle, where the drop in home prices during October was the biggest in the nation, layoffs are looming in some industries, and local city and county budgets are facing serious deficits. Weak economic conditions are likely to produce a sizeable deficit in Washington State's general fund as well.
On the bright side, Washington has a diverse industrial base and a strong education system. Road builders on the west side of the Cascades should find plenty of work on Washington State Department of Transportation projects this year. That's good, because WSDOT has reported a growing number of contractors bidding on state road projects recently. Tower cranes continue to dot the skylines of Seattle and Bellevue, though rising office vacancy rates suggest new projects may not follow on pace to keep up with the completion of current ones. Nevertheless, Seattle recently was predicted to be the top commercial real estate investment market in the nation during 2009 by the Emerging Trend in Real Estate report.
The economy in Spokane, the major population center in eastern Washington, is slowing, too. Still, Sacred Heart Medical Center recently announced plans for a $175 million expansion that would add 175 beds and make it the biggest hospital in the state. Overall, construction in Washington should be down again in 2009 but rebound the following year.
In an unusual turn of events, Oregon registered declines in all seven construction categories tracked in PB&E's Contract Awards Summary during 2008. The financial crisis has hit Portland builders hard, forcing delays or cancellations of big projects that had been in the planning stages. Architectural firms are laying off designers, and contractors are looking to public markets, such as schools and municipal structures, to keep their workers busy.
Construction employment, including residential, is projected to fall by 8.2 percent in 2009 and is not expected to turn around until 2011.
Fortunately, several major bond issues were approved in the November election, which eventually will produce some substantial building projects. The Portland Community College bond alone was for $374 million, and the Oregon Zoo bond was $125 million.
Meanwhile, Gov. Ted Kulongoski has announced plans to propose a major transportation package to the Legislature this month. He wants a $3.1 billion, five-year plan to invest in roads, bridges and other transportation projects, with the dual aims of improving travel and commerce and putting Oregonians to work. It's a forward-looking economic stimulus package: Oregon gets an estimated 6,700 good-paying construction jobs soon after the plan takes effect, and the state will have a more efficient transportation system after the economy recovers.
But neither the bond issues nor the transportation plan — if it wins approval — will affect the Oregon construction market until after this year. In all likelihood, 2009 will be the third straight year that total contract volumes fall in Oregon.
Despite the fact that the Idaho economy appears to have slid into recession during 2008, the state performed well in PB&E's Contract Award Summary with a double-digit gain over the previous year. Meanwhile, Idaho's new home construction activity is extremely weak, with a loss of roughly 5,000 construction jobs during the past year.
It may be unrealistic to expect another up year for non-residential construction in Idaho during 2009, but there's no reason to expect a major drop-off, either. Still, developers continue to roll out plans for projects in the Boise area. Typical of these are the $97 million Boise Retirement Community, which Greystone Communities plans to build in the Boise foothills, and a 100-acre business park at the BridgeTower mixed-use development in northwest Meridian.
Highway work should continue apace in 2009, and that's not particularly hopeful. Roughly $240 million is needed per year to maintain and improve Idaho's roadways, but the Idaho Transportation Department hasn't been spending that much. The shortfall has been primarily blamed on a 12-year-old 25 cent fuel tax and 11-year-old vehicle registration fees that vary on model year and end up being between $24 and $48. Last year, the Legislature refused to pursue a proposal from Gov. C.L. "Butch" Otter to increase registration fees to $150, and increasing the fuel tax has been increasingly unpopular with lawmakers. In the meantime, the ITD scaled back the amount of money it would ask for in 2009, cutting its initial $229 million request to $125 million.
Looking long-term provides for a greater level of optimism. Idaho has strong population growth, extremely competitive business costs, a pro-business environment and outstanding recreational opportunities. These are the dishes for a solid menu that should again place Idaho among the nation's top-performing states.
Montana had another good construction year in 2008, as PB&E's Contract Awards Summary revealed the highest growth in contract dollar volume of any Northwest state.
Still, economists are downgrading Montana's economic forecast, and state revenues are expected to plummet in the next biennium. But Montana has a relatively small economy, and construction employment is a bigger part of it than in most states. Montana hasn't overbuilt in the residential sector like Idaho, for instance, so it shouldn't be facing as much of a slowdown in construction employment.
When it comes to federal funding, Montana has a key ally in Congress. Sen. Max Baucus, D-MT, chairman of the powerful Senate Finance Committee. He played a central role last summer in passing the $8 billion bailout of the Highway Trust Fund.
In a speech on the Senate floor Baucus said, "Ensuring the Highway Trust Fund remains solvent means my state of Montana will not have to suffer more than $98 million in funding cuts, as well as approximately 3,500 job losses, in the next year."
In 2009, Montana will be in the second year of a two-year state building program totaling $301 million for the university and corrections systems, a major highway project and other work. We expect Montana construction to hold steady in 2009.
Contract awards in Alaska rebounded during 2008 from a down year in 2007, but their volume didn't reach the record level set in 2006.
In the November election, Alaska voters approved the sale of $315 million in state general obligation bonds to finance transportation projects. The first of those projects won't start until 2011, but the bonds still promise long-term stability in the highway market. Similarly, two rival proposals for constructing the 730-mile The Denali Alaska gas pipeline envision construction starting in 2010.
Good signs for 2009 include the facts that Alaska has one of the lowest foreclosure rates in the nation, and its housing prices have not declined substantially. At the same time, the downturn in the global economy is likely to touch Alaska in two sectors — mining and tourism. And the recent drop in petroleum prices could hurt, too, by putting a damper on State of Alaska revenues.
On balance, look for Alaska construction to continue at it current pace for another year.